“The greatest trick the Devil ever pulled was convincing the world he didn’t exist”.
The last few weeks have been interesting in markets and it’s time for my (short) take :). The best take on this topic is Matt Levine’s Money stuff newsletter. My take is about risk which is core to finance. I highly recommend my favorite book on this topic – Pandora’s risk for an excellent introduction to risk and how to think about it. Risk in the finance world is always about loss of capital. At the end of the day, finance is about money and the golden rule of money is to never lose it 😂. Every financial transaction we undertake has a risk of capital loss. These last few weeks have been a crash course in counterparty risk (DTCC clearing et al).
It’s a question I’ve been brooding about ever since the European central bank announced its digital euro project. But first, let’s take a walk through memory lane and establish some concepts and abstractions to build upon.
Humans at our core are consumers and consumption is central in our economic model. Consumption drives everything. We have needs and wants and we want them fulfilled. Businesses are the organizational unit that builds the goods to satisfy these needs and wants. They produce the goods that customers want. Money is the grease that makes this machine work, it’s the unit of exchange. At steady-state consumers need to have a source of money which is either from some form of employment (trading time for money) or via borrowing (trading collateral for money i.e credit). Consumers can either save, invest, or spend the money that they have. Savings and investment are just steps on the way to spend. The end state is always to spend down the cash and exchange it for goods and services.
We take a break from our regular programming to remind everybody to go vote. This election is important, y’all know that. Just vote if you haven’t already. I don’t care who you vote for, just vote.
Another question that I have been pondering is – We know the stock market is up and to the right, but it’s not the real economy. How is the real economy doing? How bad is it – Is there another shoe to drop? As I dug into some indicators, color me pleasantly surprised.
I’ve been spending some time thinking about the long term implications of increasing central bank intervention (primarily the US Fed), and how that changes the landscape of banks and fintech. What follows is an attempt to flush out an idea of how Fed intervention is good for fintech in the long run.
I have a simple framework to think about how banks work. Banks have two sources of profit, user profit, and risk profit. User profit is what customers are willing to pay for services that provide value. Some examples are, charging for managing your investments, the entire process of giving you a loan (origination fee), converting currency, processing payments, etc. Risk profit is what banks earn by the nature of providing maturity transformation and inventory facilities. Some examples are loans (compensated for taking credit risk) and market-making (compensated for taking inventory risk). Continue reading “Access to the central bank, the final frontier for fintech?”→
Today’s post is of the wonkish type. A few of us in the fintech pm group started chatting about certain macro trends and that discussion sparked the idea for this post. BTW this is one of the many reasons I really like having a curated private group – it leads to broader and deeper conversations. Today’s topic is inflation!
The brilliant odd lots podcast had Richard Koo on to discuss his theory of a balance sheet recession. The central idea is that when a credit bubble bursts and the private sector and consumers both start to deleverage it causes the economy to go into a demand loss spiral, which is a counterintuitive result. If excess leverage caused the bubble then deleveraging and repairing your balance sheet is the most rational individual choice, but this de-levering in aggregate is the wrong choice for the economy as a whole. I would highly recommend reading this paper that goes into some details and also reading his book.
Alphachat (great podcast btw) had a recent episode on Labor market slack that raised some intriguing questions. The central question is how to define slack, what is the right metric. The end result was that slack means different things to different people – but there is one thread that I’d like to explore more.
Let’s start with the concept of NAIRU (non-accelerating inflation rate of unemployment). Wikipedia defines it as “NAIRU refers to a level of unemployment below which inflation rises”.Central Bank Monetary policy is always and forever worried about inflation. The expected cycle is that as unemployment falls, wages will rise as supply of workers is constrained – less supply, more depends, prices i.e wages have to rise. When wages rise, input costs for producers rise which they will pass on the end consumers. Thus the general price level of the economy will rise hence leading to inflation. Continue reading “The GFC changed us as a generation – adventures in labour market slack”→
A thought experiment on the sort of fintech experiences and products we’d want as consumers in the distant (or near) future. The thought process is structured as a conversation between an older father and an adult son. Italics is the dad.
So son, hows your financial life going? Everything under control?